Cryptocurrency Hack - Conversion under Texas Law?

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Cryptocurrency Hack - Does Texas Law Recognize Conversion of Cryptocurrency?

This post discusses the elements of a claim for conversion under Texas law, and whether that type of claim would cover a cryptocurrency hack situation such as Bitcoin theft.  As discussed below, a claim for cryptocurrency conversion likely would be treated by Texas courts similar to theft of a bank account or bank deposit such that Texas law would not recognize a claim for conversion of cryptocurrency or any other kind of digital currency.  Plaintiffs should look to other Texas law to remedy such a theft.

Elements of Conversion under Texas Law

To establish a claim for conversion of property under Texas law, a plaintiff must prove the following elements:

(1) the plaintiff owned or had possession of the property or entitlement to possession;

(2) the defendant unlawfully and without authorization assumed and exercised dominion or control over the property to the exclusion of, or inconsistent with, the plaintiff's rights as an owner;

(3) the plaintiff demanded return of the property;

(4) the defendant refused to return the property; and

(5) the plaintiff was injured by the conversion.

SeeLawyers Title Co., 424 S.W.3d at 718 and Tex. Integrated, 300 S.W.3d at 365-66 and United Mobile Networks L.P. v. Deaton, 939 S.W.2d 146, 147 (Tex. 1997) (per curiam) for a discussion of Texas conversion law.

Conversion of Money under Texas Law - Does Conversion of Money include Digital Money?

In Taylor Pipeline Constr., Inc. v. Directional Rd. Boring, Inc., 438 F. Supp. 2d 696 (E.D. Tex. 2006), the court held that money can be converted when it is a specific chattel or when money is held by a party for safekeeping with no claim to title.  After title to money passes by delivery, the court held that the identity of money is lost by being changed into other money or an equivalent.  In other words, conversion is not a cause of action when funds alleged to have been converted cannot be traced.  This suggests that a Texas court would not likely hold that digital money, such as cryptocurrency, could be converted.

Cryptocurrency Hack under Texas Law

It appears as though Texas law has not caught up to addressing conversion of cryptocurrency.  At best, there’s a recent article regarding Texas regulating cryptocurrencies through the Texas State Securities Board.  The board recently issued emergency cease and desist orders against different cryptocurrency companies for allegedly violating sections of the Texas Securities Act.  However, regarding conversion of cryptocurrency, there does not appear to be targeted laws or cases yet.  It appears as though cryptocurrency is still treated like a bank account under Texas law — conversion not available as a cause of action.  Given the state of Texas law, in the event of a cryptocurrency hack, a plaintiff likely will be better off pursuing a claim other than conversion.

Interested in reading more about cryptocurrency and blockchain technology?  See these additional posts:The Intersection of Cryptocurrency and Intellectual Property Law The Rise of CryptocurrencyBlockchain Technology and How it Relates to Virtual CurrenciesThe Perils of Cryptocurrency and Blockchain Technology

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